Surprising jobs reports stem fears of recession

Fears of recession seem to have receded on the news of a far better than expected jobs report from the Bureau of Labor Statistics. That caused a domino effect starting with Federal Reserve Chair Jerome Powell and ending with a 650 point gain for the Dow.

The report from the BLS showed that December’s non-farm payrolls increased by an astounding 312,000 in December, well above the 176,000 predicted by Dow economists. While that might lend people to think the unemployment rate would fall even lower, the opposite happened and the unemployment rate went up to 3.9 percent from 3.7 percent.

Salaries also increased by 0.4 percent from November and 3.2 percent over the last year. However, many laws went into effect in multiple states to legally increase the minimum wage in 2018 and even more at the start of 2019. The Federal minimum wage stands pat at $7.25 per hour.

The report from the BLS was preceded by the Moody’s/ADP analytics survey showing that private payrolls crushed the prediction. Reuters had forecast the addition of 187,000 jobs whereas the data showed 271,000 jobs were added in the month of December. Moody’s Analytics chief economist Mark Zandi cited ‘favorable December weather’ as part of the reason the job market did better than expected.

That weather may have been the reason construction was the fastest growing sector according to Moody’s report. Construction added 37,000 jobs despite increased labor and materials costs.

Fed stays patient, stocks soar

After the release of the jobs report, Fed Chair Jerome Powell, participating in a roundtable with former chairs Janet Yellen and Ben Bernanke, emphasized that they will be patient in raising rates. That caused the stock market to rally strong with the Dow shooting up over 650 points, the S&P 500 gaining 2.77 percent and the NASDAQ Composite rising by 3.4 percent.

Friday was a stark contrast to the first days of trading in 2019 that came in with a big thud. The Dow took a dive of more than 150 points on the first day of the year. That was compounded on Thursday when Apple blamed China’s economy for their $5 billion predicted earnings shortfall. The Dow reacted by sinking more than 600 points. Some investors view Apple as a proxy to China’s growth.

Less than ideal reports from markets in China and Europe certainly contributed to the softened start to the new year. But an announcement this morning from China’s commerce ministry that the US and China would have some trade talks as soon as Jan. 7.

While bond yields were still down earlier in the week after a sluggish start to the new year, this morning they rose as the stock market rallied. As of this morning the 10-year Treasury benchmark yield is sitting around 2.65 percent, an increase of .10 percent from yesterday’s close. Still, 2.65 percent is significantly lower that the near term high of 3.25 percent only 2 months ago.( See chart below)Mortgage rates have enjoyed this rally as well.

On Wednesday, Goldman-Sachs revised down its prediction for growth in 2019 from 2.4 percent to 2 percent. They also forecast a possibility for growth to slow even further and hit a snail’s pace during 2019. However, the bank did not indicate they believe a recession was ahead, citing a lack of significant inflation and market bubbles.

I see the GDP landing around 2.5 percent, a 3.25 percent 10-year Treasury yield and inflation defined by PCE at 1.9 percent at the end of 2019.

Lower rates didn’t help housing

The move to Treasurys for investors helped reduce the mortgage rate by 24 basis points from Sept. 2018 but did not seem to help the housing market. Instead, total mortgage applications have slowed to an 18-year low.

According to the Mortgage Bankers Association, total mortgage applications dropped 9.8 percent for the week ending Dec. 28. That put volume more than 20 percent lower than a year ago. Average 30-year fixed mortgage rates ended the year around 4.8 percent but many homeowners did not refinance and many homebuyers held off.

The government shutdown is a looming issue for people buying or refinancing right now. FEMA bowed to pressure and will issue flood insurance policies during the shutdown. It’s important to note that, for now, USDA loans are the only loans that will not be processed as normal. FHA, VA and Conventional loans for Fannie Mae and Freddie Mac are operating under a contingency plan and can be processed and closed as normal.

A new report this week from CoreLogic only compounds the housing situation. The company’s latest forecast predicts American home prices will rise by 5 percent with mortgage payments also increasing by about 11 percent in 2019.

The silver lining is that 30-year fixed mortgage rates went down to start the year and, according to Freddie Mac, are sitting around an average of 4.51 percent as of this week. Whether or not that can encourage people to buy remains to be seen.